More private capital is needed to achieve the Sustainable Development Goals (SDGs) by 2030. Impact investing is a potentially powerful tool to mobilize private capital for achieving the SDGs. Therefore, it is desirable to improve the effectiveness and to accelerate the growth of the impact investing sector. The Netherlands Advisory Board on impact investing (Dutch NAB) is an initiative under the umbrella of the Global Steering Group for Impact Investing (GSG) which focuses on scaling up investments in impact and increasing cooperation in the Dutch impact investing sector.
In the ‘State of the Dutch impact investing ecosystem’ report1, one of the barriers cited by institutional investors to scaling up their impact investments was the high level of capital charges required by risk regulations. Reducing capital charges on impact investments would have a positive effect on the mobilization of larger pools of institutional capital. A working group has been established to conduct research regarding this issue. The purpose of the research is to provide a data-driven risk assessment of impact investments that reflects the risk of such investments appropriately. The outcomes are to be utilized as supporting evidence to engage with stakeholders and policymakers.
Private debt is the most prominent asset class in impact investing; in the Dutch sector it accounts for 47% of impact AuM. Therefore, the scope of the research is focusing on private debt in emerging markets. The research specifically investigates the capital requirements regulation Solvency II for insurance undertakings in the EU, but plans to expand to regulations of other types of institutional investors (banks, pension funds).
Data-driven risk assessments which expose the actual risk of such investments must be provided. But thus far, private debt in emerging markets data is scarce and therefore the knowledge on its risks is limited. The goal of this research is to provide a risk assessment of private debt in emerging markets to shed light onto the actual risks of the asset class. The GEMS database, containing the most exhaustive credit data in emerging markets, both in number of data points and length of coverage, is the most appropriate dataset to carry out such data-driven risk assessment of this key asset class in impact investing. Existing GEMS publications include selected and aggregated data only, and as such are not suitable to conduct detailed risk analysis. As GEMS is fed by data from largely public institutions (Development Finance Institutions and Multilateral Development Banks), the full database should be considered a public good.
Recently, the successful fundraising of the ILX fund has largely been based on the use of GEMS data. It can be viewed as a precedent that proves that investors are willing to allocate their money towards private debt in emerging markets if they are provided with insights into the risks of such investments. The venture has sparked an interest in the finance community as a whole. Further research must be performed and published in order to establish private debt in emerging markets as a credible asset class. Our research can be the next step supporting this process because, on one hand, it influences policies to remove regulatory barriers and, on the other hand, it provides a solid analysis that will further engage the interest of institutional investors. Thereby, more private capital will be mobilized to flow into the asset class which contributes to achieving the SDGs.
The final report will be released and made publicly available by the Dutch NAB. Making use of the GSG/NABs network, the knowledge produced will be distributed to major stakeholders within the sector and policy makers at national and EU level to rally for change.
We call upon the European Investment Bank and GEMS governance to provide access to their database both for the purpose of finalising our research and for the benefit of the entire investor community.
You can sign the petition here.
Yvonne Bakkum, Laure Wessemius-Chibrac
Chair, Dutch NAB MD, Dutch NAB